Thursday, September 24, 2009

On governments pulling people out of recessions

"To prevent the Minsky moment from becoming a national calamity, part
of his solution (which was shared with other economists) was to have
the Federal Reserve - what he liked to call the "Big Bank" - step into
the breach and act as a lender of last resort to firms under siege. By
throwing lines of liquidity to foundering firms, the Federal Reserve
could break the cycle and stabilize the financial system. It failed to
do so during the Great Depression, when it stood by and let a banking
crisis spiral out of control. This time, under the leadership of Ben
Bernanke - like Minsky, a scholar of the Depression - it took a very
different approach, becoming a lender of last resort to everything
from hedge funds to investment banks to money market funds.

Minsky's other solution, however, was considerably more radical and
less palatable politically. The preferred mainstream tactic for
pulling the economy out of a crisis was - and is - based on the
Keynesian notion of "priming the pump" by sending money that will
employ lots of high-skilled, unionized labor - by building a new
high-speed train line, for example.

Minsky, however, argued for a "bubble-up" approach, sending money to
the poor and unskilled first. The government - or what he liked to
call "Big Government" - should become the "employer of last resort,"
he said, offering a job to anyone who wanted one at a set minimum
wage. It would be paid to workers who would supply child care, clean
streets, and provide services that would give taxpayers a visible
return on their dollars. In being available to everyone, it would be
even more ambitious than the New Deal, sharply reducing the welfare
rolls by guaranteeing a job for anyone who was able to work. Such a
program would not only help the poor and unskilled, he believed, but
would put a floor beneath everyone else's wages too, preventing
salaries of more skilled workers from falling too precipitously, and
sending benefits up the socioeconomic ladder.

While economists may be acknowledging some of Minsky's points on
financial instability, it's safe to say that even liberal policymakers
are still a long way from thinking about such an expanded role for the
American government. If nothing else, an expensive full-employment
program would veer far too close to socialism for the comfort of
politicians. For his part, Wray thinks that the critics are apt to
misunderstand Minsky. "He saw these ideas as perfectly consistent with
capitalism," says Wray. "They would make capitalism better."

So, my take on it:
Most economists don't support a minimum wage because it drastically increases unemployment. However, given that we have a minimum wage, a system like this could actually work, given 2 conditions. Firstly, welfare would need to be abolished for individuals capable of working who are not fully employed. Secondly, any job provided by the government would have to pay significantly less than the minimum wage, to incentivize people to get off the government payroll. In this situation, the system wouldn't be any more socialist than welfare (a quite reasonable socialist policy, as long as administered in a way that doesn't too heavily incentivize complacency), but would help the unemployed build skills and work experience while getting the taxpayer some return for their buck.
A likely-necessary component would be a clause that those on the government payroll must seriously interview for other jobs regularly - certainly multiple times per month. Indications that the interviews weren't being taken seriously may need to be grounds for ineligibility.

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